It’s been a disappointing year for investors in Centrica (LSE: CNA). Indeed, the supplier of domestic energy has seen its share price fall by 10% during the course of 2014, while the FTSE 100 is only down 2% over the same time period. Despite market sentiment being weak, though, Centrica has the potential to be a strong long term performer that could help to pay off your mortgage.
Here’s how…
A Low Valuation
While many investment commentators talk of an impending market fall due to valuations being higher now than they have been in previous years, Centrica still offers good value for money at current price levels. While the FTSE 100 trades on a price to earnings (P/E) ratio of 13.4, Centrica’s P/E is 11.7, which shows that there is potential for its rating to be revised upwards over the medium term. This could mean a significant amount of capital growth for holders of shares in Centrica.
A Defensive Play
Clearly, Centrica and its sector peers are experiencing a challenging period at present. There is a large amount of uncertainty regarding the general election in 2015, with a new government having the potential to be less amiable to a growing bottom line at utility companies. Indeed, much of Centrica’s disappointing share price performance of recent months can be attributed to a substantial amount of political risk. This is showing little sign of lifting, in the short term at least, although it appears as though the current valuation adequately prices this in.
Top-Notch Income
As ever, Centrica doesn’t disappoint when it comes to dividends. Shares in the company currently yield 5.7% and, furthermore, dividends per share are forecast to increase by an impressive 3.2% next year. This is ahead of the current rate of inflation and is ahead of many of Centrica’s index peers. Certainly, profit growth is likely to stall this year, with earnings per share (EPS) due to fall by 17%, thereby narrowing dividend cover to just 1.25 times. However, Centrica is expected to return to growth next year when the bottom line is forecast to increase by an impressive 10%, thereby making dividend payments far more comfortable for the company.
Looking Ahead
Although shares in Centrica come with a considerable amount of political risk, this appears to be adequately priced in. Indeed, Centrica offers good value at current levels and, when combined with a strong yield and the potential for an upward revision to its rating, means that the company appears to have a bright future and could, therefore, make a positive contribution to your mortgage repayments.
